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Foreclosure means you'll lose your home and all the money you put into it. Thankfully, there are ways to avoid foreclosure, and your lender may be able to help.
If you stop paying your mortgage, your home will eventually go into foreclosure. That means your lender has the right to seize your home, kick you out, and sell the home to recoup its losses.
Foreclosure is a painful process. It can involve a visit from the sheriff to physically evict you from your home, whether you’ve packed your bags and collected your belongings or not. The house’s locks will be changed. And, of course, you’ll lose your home and all the money you’ve put into the home to grow it as an investment.
Foreclosures can also severely damage your financial health. Foreclosures stay on your credit report for up to seven years, making it difficult to take out a new mortgage or other types of debt like a car loan or credit card.
But foreclosures don’t happen right away. You’ll be given months of advance warning, opportunities to plead your case for relief, and several repayment options that can help you avoid foreclosure.
Foreclosure occurs when you’ve become delinquent on your mortgage payments. You’re considered delinquent after missing your first mortgage payment, but you have time catch up. But if you keep neglecting to pay the unpaid balance and new payments each month, then you’ll be considered default. That’s when the foreclosure process begins.
Foreclosure may take several months to complete — the exact length of time depends on your state’s laws. But you’ll receive notices during that time alerting you that you’re in default and that foreclosure could be imminent. In some states, you’ll receive a notice within 30 days of defaulting, which is sometimes called a lis pendens.
If you can’t make your mortgage payments, you have several options to look into before the lender forecloses on your home. Remember, the lender doesn’t want to foreclose your home; they want to collect the money they’re owed, and foreclosure could mean losing money for them.
When you receive a notice of default, you need to respond or make a payment to avoid foreclosure. Sometimes, the lender will present you with loss mitigation options to help you stay in your home. You may even be asked to come to a loss mitigation meeting where you can decide which option is best for you.
Loan modification is one of the options that lets you keep your home. Loan modifications are usually offered to people who’ve had major changes in their income, such as getting laid off from a job, or losing a spouse’s income stream. The modification adjusts your payments so they’re more affordable for you.
The catch is that loan modification means that you’ll be paying off your mortgage for a much longer time, sometimes up to 40 years. The mortgage balance remains the same, so with lower payments it will take longer to pay off. But that means paying more interest over that span of years.
Applying for a mortgage modification will buy you some time. The foreclosure process pauses while your request is being considered. (With one exception: if you apply within 37 days of the foreclosure sale, also known as a sheriff’s sale.)
If you can come up with the money to make delinquent payments while your application for mortgage modification is in process, then you may be able to avoid modification entirely.
Forbearance means that you stop making payments for an agreed-upon time. If your lender lets you choose forbearance instead of foreclosure, you’ll have extra time to gather your cash to make both delinquent mortgage payments as well as current payments.
However, if your lender doesn’t think you’ll be able to make current payments after the forbearance period, then you won’t be allowed to use this option.
A deed in lieu of foreclosure is effectively a foreclosure without most of the negative consequences of foreclosure. For one, you get to leave the home (mostly) on your terms, and your credit won’t be affected as badly.
But there are some caveats to choose a deed in lieu of foreclosure. Your home must be worth more than you owe on it, as the lender will sell the home after you vacate it to recoup the balance on your mortgage. You may also have to make some payments toward the remaining mortgage balance.
If your home has decreased in value, you may not be eligible for a deed in lieu of foreclosure. A similar option is the short sale, where you sell your home as quickly as possible (usually within a matter of weeks or months) to pay off the delinquent mortgage payments.
Because of the limited time span and urgency, you’ll probably have to accept a below-market rate for the short sale. In addition, you’ll have to pay the remaining mortgage balance.
Bankruptcy is one of the more severe options you can choose, but it will help you stay in your home. If a court allows you to declare bankruptcy, it may put you on a payment plan that allows you to make payments against the delinquent amount as long as you keep up with your current mortgage payments.
Note that, in most cases, you must declare Chapter 13 bankruptcy if you want to keep your property. Declaring Chapter 7 bankruptcy doesn’t involve creating a repayment plan and could mean selling your home anyway.
Note that a bankruptcy can make it more difficult to take out a mortgage in a future. Learn more about getting a mortgage after bankruptcy.
The first thing you should do if you think you’re going to miss a mortgage payment is to call your lender as soon as possible. They’ll steer you in the right direction to avoid foreclosure if possible.
There are other steps you might want to pursue as well.
The federal government’s Making Home Affordable (MHA) program provides homeowners with free advice and assistance that can help keep you in your home. State and local governments may also have resources specific to where you live.
For Federal Housing Administration (FHA) loans, which are loans for certain qualified borrowers, there is an FHA National Servicing Center that you can call for assistance.
If you’re not in foreclosure yet and haven’t missed any payments, a refinance might be your best option. Refinancing means taking out a new mortgage to pay off your old one. It can reduce your payments because you’re stretching your old balance across a new term. If you had $200,000 left on your mortgage and 15 years left to pay it, if you refinance into a 30-year term, that $200,000 gets spread out across 30 years instead of 15.
But a refi comes with closing costs just like taking out your original mortgage. For that reason, it can take many years to break even and start saving on the lower payments. But if you need lower payments now and can afford the closing costs, a refinance can help you from becoming delinquent.
When you sell your home, you’ll use the proceeds to pay off your existing mortgage balance. If you take out a mortgage to move into a smaller, more affordable home, you’ll have lower monthly payments.
Downsizing may be your best bet if you don’t want to refinance; compare your mortgage payments from refinancing versus taking out a new mortgage for a smaller house and decide what’s right for you.
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Before your mortgage goes into default, you’ll receive notices from your lender. Sometimes, you’ll receive notices from people who are not your lender, but who promise to help you pay your mortgage and avoid foreclosure.
Shred these notices as soon as possible. Many times, these people use publicly available information about your loan to offer mortgage relief, such as mortgage modification. But this is false; most of these schemes either involve transferring your home to the scammer in return for a large loan (that you still have to pay back), or simply collecting fees and giving you nothing in return.
In the end, you may still be at risk for foreclosure, even after paying high fees or interest to the scammer.
When you receive a notice from someone other than your lender or government, call your lender right away to make sure it’s accurate. The so-called services offered by the foreclosure scammers are usually offered free of charge by your lender.
If you’re shopping for a home, you may find deals on homes that have been foreclosed on. But not every foreclosed home is a good deal, and some may not be on sale at all.
You may see something called “preforeclosure,” which means that the homeowner is delinquent. But it doesn’t mean the home is definitely for sale. These listings are generated by unscrupulous brokers who expect to generate interest in a home that might go into foreclosure.
However, if you reach out to the homeowner directly, they may actually be interested in selling, especially if they’re behind on payments. This is similar to a short sale, but your methods may vary.
Homes that are actually foreclosed may be very affordable. You’ll likely see listings for below-market-rate prices, especially if the lender is trying to sell quickly.
But, in some cases, you may have to pay in cash for a foreclosed home. In other cases, to buy the home you may be able to take out a 203(k) mortgage, which refers to a type of loan backed by the FHA. (The “203(k)” refers to the section of the law that authorizes the FHA, not the value of the loan.)
And be wary of the house itself. You will sometimes have to buy the house without getting to see it, and it may need cleaning, repairs, or even complete remodeling.
Before buying a foreclosed home, make sure you pay for a good title search. If there any liens on the home, you could become respond for them, and the title search should turn up those liens ahead of time. It will also confirm that the foreclosure was executed correctly, because a foreclosure that doesn’t follow the law may mean you’re living in the house illegally (and the previous owner may still have a claim to the home).
We recommend picking up title insurance before buying a foreclosed home. If despite the title search there’s still a problem after you move in, you may be forced to vacate the home. Title insurance will reimburse you for the costs you paid toward the home.
Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.
This post contains references to products or services from one or more of Policygenius' advertisers or partners. While these codes earn us a small fee at no additional cost to you, they do not influence editorial content and we only refer products we love.
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